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Off the auction block
March 2011
by Lloyd Dunlap  |  Email the author


CARLSBAD, Calif.—Faced with slowing growth and declining profits, Genoptix, a cancer testing company, put itself up for sale in December and has now been rewarded with a tender offer from pharmaceutical giant Novartis.  
According to several news reports, Genoptix hired Barclays PLC to run an auction that ultimately resulted in the Novartis offer. In late January, Novartis announced that it has entered into a definitive agreement for the acquisition of Genoptix, a laboratory that provides personalized diagnostic services to community-based hematologists and oncologists. The acquisition will enhance Novartis's tools and services that aim to improve health outcomes for patients by advancing the ability to define and monitor individualized treatment programs, the company states.
Under the terms of the agreement, Novartis will commence a tender offer for all outstanding shares of common stock of Genoptix at $25 per share in cash. This represents a total equity value of $470 million and an enterprise value of $330 million. The Novartis offer represents a premium of 39 percent over Genoptix's unaffected share price of $17.98 on Dec. 3. It also implies a 27 percent premium over the closing price of $19.76 on Jan. 21, according to a Novartis statement.  
"The acquisition of the Genoptix medical laboratory will serve as a strong foundation for our individualized treatment programs," says Joseph Jimenez, CEO of Novartis. "Genoptix is an innovative company with a talented team of people who share our commitment to transforming the way medicine is practiced. By integrating Genoptix within Novartis, we can greatly enhance the value we add to patients, clinicians, payors and society."  
In the wake of questions about valuation in its $28 billion acquisition of Alcon, some observers were pleased to see that Novartis is still in the acquisition mode. But if the company was playing the role of white knight when it snapped up Genoptix, it was doing so for a damsel with somewhat tarnished prospects.  
Genoptix sales have been hurt by unemployment in the United States, which has reduced the number of patients seeking care from blood specialists and cancer doctors who use its tests. Genoptix reported net income of $30.6 million on revenue of $184 million last year, but growth has slowed to a trickle to sales of about $195 million in 2010 after jumping nearly 59 percent in 2009.  
And in its own regulatory filings, Genoptix has admitted that any shift toward in-network billing could hurt the company's future results. In its latest quarterly report, the company notes that "We were generally subject to reimbursement as a non-contracting provider for approximately half of our revenues for the three and nine months ended Sept. 30, 2009, and 2008. Use of a non-contracting provider typically results in greater coinsurance or copayment requirements for the patient, unless we elect to treat them as in-network in accordance with applicable law, which results in decreased revenues because we do not generally collect the full applicable out- of-network patient coinsurance or copayment obligations. In instances where we are prohibited by law from treating these patients as in-network, thus … requiring them to pay additional costs or copayments, such patients may express concern about these additional costs to their hem/onc. As a result, that hem/onc may reduce or avoid prescribing our services for such patients, which would adversely affect our results of operations and financial condition. Should any of the third party payors with whom we are not contracted insist that we enter into a contract for the specialized diagnostic services we provide, the resulting contract may contain pricing and other terms that are materially less favorable to us than the terms under which we currently operate. If reimbursement from a particular payor increases, there is heightened risk that such a third party payor will insist that we enter into contractual arrangements that contain such terms. If we refuse to enter into a contract with such a third-party payor, they may refuse to cover and reimburse for our services, which may lead to a decrease in case volume and a corresponding decrease in our revenues. If we contract with such a third-party payor, although our case volume may increase as a result of the contract, our revenues per case under the contractual agreement and our gross margins may decrease. The overall net result of contracting with third-party payors may adversely affect our business, results of operations and financial condition."  
Founded in 1999 and based in Carlsbad, Calif., Genoptix employs approximately 500 people and will become part of Novartis Molecular Diagnostics (MDx), a unit within the Novartis Pharmaceuticals Division. The acquisition will support and expedite the development of companion diagnostic programs, especially in oncology. Novartis plans to maintain the existing operations and continue delivering Genoptix's portfolio of personalized diagnostics services to community-based hematologists/oncologists across the United States.  
The Genoptix board of directors has unanimously approved the transaction and agreed to recommend that Genoptix stockholders tender their shares. The transaction is conditional upon the tender of at least a majority of the shares of Genoptix in the tender offer, receipt of regulatory approvals and other customary closing conditions. The transaction is expected to close during the first half of 2011.
Code: E031104



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